Bombay High Court Rejects Revival Scheme, Continues Swadeshi Mills Liquidation

The Bombay High Court has recently dismissed a revival scheme for Swadeshi Mills Company Ltd., ordering the continuation of its liquidation. The decision was made after the court found that the proposed revival scheme lacked the necessary bona fides, commercial morality, and public interest. The court highlighted that the scheme, which primarily focused on real estate development, did not genuinely attempt to revive the company's textile business.

The case dates back to 2005 when the Board for Industrial and Financial Reconstruction (BIFR) declared Swadeshi Mills sick, leading to the company's winding up. A provisional liquidator was appointed in 2002, and the government of Maharashtra set up a High Power Committee to oversee the disposal of assets and payment of dues. The plant and machinery were sold, and the proceeds were used to partially pay workers and secured creditors.

Secured creditors, including the Industrial Development Bank of India (IDBI) and Bank of Baroda (BOB), obtained recovery certificates from the Debt Recovery Tribunal in 2003. IDBI's debt was later transferred to the Stressed Assets Stabilisation Fund (SASF), and the debts were assigned to the present applicant, part of the Shapoorji Pallonji Group, in 2006-07. The applicant, holding about 52% shareholding in Swadeshi Mills, sought revival under Section 466 of the Companies Act, 1956. The proposal included full payment of workers' dues with compensation and housing, settlement of creditors, and diversification into real estate development using the company's immovable properties at Chunnabhatti, Mumbai.

Minority shareholders opposed the scheme, arguing that it was materially identical to earlier rejected proposals and aimed at acquiring prime assets cheaply. They contended that the proposal inflated liabilities with post-winding-up interest and that only a public auction could ensure fair value for all stakeholders. The official liquidator reported that movable assets had been sold, but difficulties persisted in auctioning immovable properties due to encroachments.

The Court, while considering the application, noted that Section 466 of the Companies Act empowers the National Company Law Tribunal (Tribunal) to stay winding up proceedings if they ought to be stayed. The Court emphasized that upon passing of an order for winding up and appointment of an official liquidator, the custody and control of all the company's property, effects, and actionable claims are taken over by the liquidator. The liquidator has the power to sell the company's assets by public auction or private contract.

The Court relied on the principles laid down in Meghal Homes (P) Ltd. v. Shree Niwas Girni K.K. Samiti, which stated that revival must satisfy the triple tests of bona fides, commercial morality, and public interest. The Court observed that earlier revival applications had been dismissed based on these principles. In the present case, the Court found that the liabilities had been inflated by including post-winding-up interest, and the funds deposited were raised by mortgaging company assets. The Court also noted that for the past 20 years, no significant steps had been taken to complete the liquidation process.

The Court held that the proposal, which envisaged diversifying into real estate development by using the company's immovable properties, was materially identical to the revival scheme rejected in 2011. The Court emphasized that the earlier finding that the proposal amounted to an attempt to take over the lands for real estate exploitation continued to bind the Court. The Court rejected the argument that repayment of creditors alone justified a stay, reiterating that mere settlement of liabilities does not amount to the revival of the company's business.

The Court concluded that the scheme did not satisfy the triple tests of bona fides, commercial morality, and public interest. The application under Section 466 was therefore rejected, and the winding up of Swadeshi Mills was not stayed. The Court emphasized that revival must genuinely contemplate the continuation of the company's business and not serve as a device for real estate exploitation.